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What's Your ROI on Pay


According to the 2014-15 World at Work Salary Budget Survey, as in 2014, projected salary increases for 2015, for all industries, will be 3.0%. The study also reports that in 2014 between 96% and 100% of employees received an increase. The reported frequency between increases is 12.0 months. Survey participants reported that “High Performers” received a 4.0% increase.

From these statistics, we can conclude the following:

  • Organizations grant pay increases to nearly 100% of their employees annually.
  • The median increase is 3.0%.
  • High performers may receive a 4.0% increase, 33% more than the median performer.
Does this represent a highly motivational compensation philosophy that will inspire employees to invest extraordinary effort? Probably not. So how can we make pay a value-added reward system instead of an administrative burden?  

State Your Pay Philosophy

Companies write vision statements and talk about their guiding principles to increase employee commitment, but few talk about their pay philosophy and what it represents. A reward system needs to accomplish four objectives:
  • Provide a way to recognize and reward accomplishments that meet and exceed performance expectations.
  • Reinforce the culture of the organization.
  • Be cost effective, representing a good financial investment.
  • Support operational priorities.
Having and communicating a compensation philosophy increases confidence in the reward system and management. 

Expectations

Employees at all levels are often unclear about performance expectations. They may be characterized as “good” employees because they come to work every day, on time, and with a good “attitude." That’s helpful, but does it actual actually result in outputs that are needed to move the organization forward? Everyone, even the very best employees, can improve. The first step in performance enhancement is being crystal clear about expectations and standards of performance.

Many employees have only a vague understanding of what the boss expects and needs to meet performance expectations and make the department successful. This makes the odds of fully meeting expectations rather low. To increase the probability of achieving outstanding performance an employee needs to:

  • Understand what the department (or company) is trying to accomplish,
  • Know how departmental performance is being measured,
  • Understand what the employee is being held accountable for, in quantifiable terms if possible,
  • Be trained and coached to improve likelihood of success,
  • Know where to turn for help if he/she has a question, and
  • Know who to talk with if he/she has an idea about improving operations.
When performance is deemed to be exceptional, take advantage of flexibility within the reward system. Grant an increase sooner than 12-months. Grant an increase that is greater than the standard 3.0%. Make the high-performance increase 200 - 300% of the norm, not just 30% more.

Culture
The reward system can define the organizational culture. As an example, BVF Company was an industrial products company selling packaging materials to a variety of manufacturers.  The sales people at BVF were paid on straight commission. They were free to prospect and develop their territories and build their customer base. They received a commission on all sales. Once sold, their role was to maintain a relationship and take future orders. Product delivery and service issues were handled by the company. The median compensation for a BVF sales person was $200,000. Recognizing that few new customers were being developed, and upon doing a little research, BVF found that there were a number of large, potential customers within assigned territories that were not being developed.  

Through their reward system, BVF had created a culture where sales people owned the customers.  They received a comfortable income for maintaining accounts without extra effort. When attempts were made to change the compensation scheme or split the territories, sales people threatened to leave and taking their customers with them.

In BVF’s case the reward system created a culture of “lone rangers” with little commitment to long-term company success. When crafting a reward system, it’s important to consider the broader message that it conveys.

Investing in Pay

Employee compensation should be viewed as an investment rather an expense. A success-sharing compensation philosophy can be a sound investment. Success-sharing plans are funded out of incremental earnings. If there are no gains, there is no payout. By communicating the basis for the calculation, the company is demonstrates transparency, which helps build employee engagement, commitment, and trust. If paid in a lump sum, rather than a salary, it becomes a variable cost rather than a fixed cost.

Focus on Organizational Priorities

Why should the management team be the only ones who are concerned about operational efficiency? Every employee has a stake in making an organization as effective as possible.  Companies should communicate short and long-term goals and what actions are being taken to achieve objectives.  

Many organizations embark on process improvement initiatives for the purpose of winning the Baldrige or similar awards. Being an award winner is nice, but shouldn’t be the goal. The key value is the focus that such initiatives bring to communicating organizational priorities creating positive change. Then, reinforce the gains through the reward system.

Making Pay – Matter

The bottom line - consider the Reward System as one of a company’s high-impact management processes - not just for sales or management – but for everyone.
Posted: 7/29/2015 7:30:00 AM | with 0 comments
Filed under: Big, Business, Centre, Council, Group, Ideas, Joel, Myers, Pay, ROI, SBC, Small, The




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